Sterling extends gains but outlook clouded

LONDON (Reuters) - Sterling rose against the dollar on Thursday an initiative by European Central Bank President Donald Tusk on Brexit negotiations was taken as mildly positive, on a day when currencies mostly stuck to well-worn trading ranges.

Pound notes and coins are seen inside a cash register in a bar in Manchester, Britain September 6, 2017. REUTERS/Phil Noble

Tusk will ask British Prime Minister Theresa May when they meet on Friday how she will meet EU conditions before a mid-December summit for opening post-Brexit trade talks, an EU source said on Thursday.

“The Tusk headlines moved sterling a bit but there is hardly anything much to look into these tiny moves,” said Manuel Oliveri, an FX strategist at Credit Agricole in London.

Sterling extended gains, rising 0.25 percent to $1.3208. Against the euro, the pound was 0.2 percent up at 89.25 pence, still close to Wednesday’s trough of 90.14 pence.

Progress between European and British negotiators at the December summit in Brussels is seen as an important milestone in the Brexit talks, as businesses seek clarity on the terms of the divorce by the new year, when many will make investment decisions.

Peter Fitzgerald, head of multi-asset strategies at Aviva Investors, told the 2018 Reuters Global Investment Summit that the looming Brexit negotiations created “huge uncertainty” on how to trade sterling.

“You’re trading something that is almost like a weighted coin but you just don’t know which way it is weighted,” he said.

The pound fell to a four-week low against the rallying euro on Wednesday, after numbers showed UK wages still lagging well behind inflation, keeping pressure off the Bank of England to raise interest rates again after the first hike in a decade earlier this month.

“Economic data isn’t going to be a game changer as it is all about Brexit negotiations at the moment and sterling is going to be trading in a tight range until we see further clarity on that,” said Viraj Patel, an FX strategist at ING in London.

In the latest sign of weakness in the Brexit-bound economy, numbers on Wednesday also showed the number of people in work in Britain fell by the most in more than two years in the three months to September.

“The pound is likely to prove sensitive to negative economic data releases in the near term, given that the BoE has signalled that it is not in a rush to follow up their first hike,” said MUFG currency strategist Lee Hardman, in a note to clients.